So where to now for world stockmarkets with five weeks left in a miserable 2022? And what of 2023?
More and more brokers and analysts are warning that the mini-rally we have seen since late October is running out of puff as central banks show no sign of altering their harsh monetary policies which are centred on big interest rate rises.
Bank of America analysts warned on Friday that the bear rally is close to exhausting itself – commodity prices also sent a huge signal last week with falls except for outliers like gold, iron ore and thermal coal.
Strategists from Morgan Stanley and Bank of America strategists warned late last week that the rally will fizzle out due to earnings risks and the staunchly hawkish central banks.
The optimism still prevailing among investors and global share funds saw inflows of $23 billion in the week through November 16, according to financial data tracker EPFR Global data.
That was in the wake of the lower-than-expected US inflation report the week before which saw the re-emergence of the ‘Fed pivot” story to a new policy course of lower and slower rate rises.
But that idea has run out of puff and various senior Fed members crushed the idea in public comments last week.
That hit Wall Street. The Dow rose 199.37 points, or 0.59%, to 33,745.69 on Friday, the S&P 500 climbed 0.48% to 3,965.34 and the Nasdaq finished just 0.01% above the flat line at 11,146.06.
For the week, the Dow ended 0.01% lower. The S&P 500 lost 0.69% for the week, while the Nasdaq ended 1.57% lower.
The ASX 200 lost 0.1% last week and is looking at a 20 plus gain when trading resumes this morning.
Bank of America strategists led by their chief, Michael Hartnett, predicted the Fed will not change course until mid 2023 and that expecting any easing before then would be a “big mistake.”
In the absence of an earlier change to the Fed’s approach, “a fair chunk of the bear market rally is behind us,” they wrote in a November 17 note.
Morgan Stanley’s Michael Wilson, a prominent bull, forecast a rough ride for stocks next year.
He warned of the negative impact weaker corporate earnings which would fuel more stock losses before a rebound in the second half.
Big global investors surveyed by Bank of America (BofA) are thinking along the same lines, according to the latest survey, released last week.
These big investors see stagflation as the dominant idea next year, and are avoiding growth style equities and remaining cashed up.
The latest Bank of America Global Fund Manager Survey shows investors are sticking with cash as stagflationary pressures grow. Fund managers are sitting on big overweights in cash and avoiding areas such as tech and consumer discretionary stocks as they prepare portfolios for dreaded ‘stagflation’.
BofA’s monthly global fund manager survey showed 92% of those who took part see “stagflation” in 2023 and above trend inflation; a net 77% see recession as likely, while for the first time in the survey’s history, more see bond yields falling rather than rising next year.
No one is expecting above-trend growth and below-trend inflation, and just 7% expect below-trend growth and below-trend inflation, the survey of 309 managers of a total of $US854 billion in assets found.
As usual, the fund managers were asked their biggest tail risks. Inflation stays high at 32% was tops, followed by a three-way tie at 18%: geopolitics worsening, central banks staying hawkish, and a deep global recession. Only 1% cite debt deflation next year.
This pessimism means another month of high cash holdings – 6.2% was the size of the average cash balance, down a touch from 6.3% in the previous month’s report.
The survey shows there’s an overweighting of about 50% to cash at present among managers.
So there has been plenty of firepower if they took the pivot story seriously and though shares and commodities would rise as the strong US dollar lost ground.
That hasn’t happened.
Managers were overweight to alternative investments, reflecting the fact that stocks and bonds have fallen in tandem this year, and commodities, which have surged in the inflationary environment – let’s hope that’s not crypto!
Managers were 35% underweight in equities and about 20% in bonds, both of have lost heavily so far in 2022.
Defensively, fund managers were overweight in healthcare, consumer staples and insurance.
Sectors such as energy and banks were also common overweights, reflecting their respective correlations with higher inflation and interest rates.
Investors were underweight consumer discretionary stocks and tech, where high-growth shares are being hammered by rising rates. That’s been common now for months.
There’s a strong preference for quality over junk, with 72% of investors saying they expect companies with high-quality earnings to beat those with low-quality earnings and a net 43% preferring high-grade bonds over high-yield (a record high).
Meanwhile, a net 61% favour high dividend yield stocks for the coming 12 months while most managers expect value to keep outperforming growth as interest rates continue to rise (So the Dow-skewing stocks should beat the Nasdaqs?)
The top two “contrarian trades” are now being ‘long’ emerging markets and ‘short’ the US dollar which is not a stupid idea because it (and the Fed’s monetary policy stance) will be the greatest influences next year on shares and commodities.
